Tax evasion is a global phenomenon. Tax collection is
based on the theory that not many people wish to voluntarily pay taxes.
Therefore tax collection system must be developed in such a manner as
will ensure flow of taxes into the coffers of the State to enable it to
not only meet operating/running expenses but also finance development
expenditure. Our position in Pakistan is a difficult one. The public
needs to be educated about financial security aspects of the country.
Non-payment of taxes, enjoying the luxury of liberal exemptions
available in laws and deciding to avoid paying legitimate and due taxes
is not in the interest of stability and integrity of the country. Print
and Electronic media needs to disseminate these thoughts to persuasively
motivate people to positively respond to paying taxes.

At present, the Government of Pakistan has
difficulties as internal financial cushion is not available to finance
the operating and development needs as is apparent from table No. 1.

TABLE: 1

FINANCIAL
NEEDS AND AVAILABILITY OF FINANCIAL RESOURCES 2003-2004

NEEDED

RS. BILLION

1. Recurring Expenditure

645

2. Development Expenditure

160

805

Less: Available

513

Shortfall

292

The above shortfall necessitates borrowings (at home
and abroad). This creates tremendous pressures on the recurring budgets
in the shape of debt servicing and cripples economic sovereignty of
Pakistan. We cannot afford this luxury any more. Therefore, there is a
need to properly understand tax evasion dimensions and develop a sound
strategy to tackle it for adding strength to financial frontiers of our
beloved country.

A sum of Rs. 10 billion was collected as income tax
which hitherto was evaded tax. However, the general perception was that
the amount ought to have been Rs. 100 billion. We wonder whether the tax
machinery was geared to achieving higher amount. In any case, the
collection was much higher than all amounts of the previous declarations
of tax evasion and consequential collection.

TAX EVASION: INRETROSPECT

Table 2 presents an abridged position of declaration
of black money in the past in the history of our country. These
declarations were made thrice in the past. The announcement of 1958
related to Ayub era. The 1969 event occurred in Yahya Khan's era. The
1976 event was in the tenure of Zulfiqar Ali Bhutto's Government.

TABLE: 2

DECLARATION
OF BLACK MONEY: 1958 TO 1976

YEAR

AMOUNT
(BLACK MONEY DECLARED)

PERTINENT COMMENTS

1. 1958

Rs. 1,350 million

Rs. 1,120 million related to areas which constituted Pakistan
(excluding East Pakistan which later became Bangladesh).

2. 1969

Rs. 920 million

Rs. 780 million related to areas which now constitute
Pakistan (excluding East Pakistan which later became
Bangladesh).

3. 1976

Rs. 1,500 million

Rs. 270 million was paid as tax on declared income till
August 31, 1976.

GOVERNMENT TAX AMNESTY SCHEME

The then Chief Executive of Pakistan, in his historic
speech delivered on December 15, 1999, announced a tax amnesty scheme on
the following lines:

On truthful disclosure of all tax evaded assets, a
payment of only 10% as tax allowed people to bring these assets into
their books. This amnesty was available until March 31, 2000.

The Government decided that no black money whitener
schemes were to be allowed in the future. However, the Chief Executive
of Pakistan assured that the immunities, protection and exemptions on
existing investments, deposits, bonds, foreign currency accounts etc.
would be fully honored. The Federal Finance Minister provided further
details in this respect.

CANONS OF TAXATION

Guidance has been provided by several economists and
the scholars in the past for proper payment of taxes. These have been
popularly known as canons of taxation. A summarized version of these is
given below:

ADAM SMITH'S CANONS OF TAXATION

Adam Smith's contribution to economic theory is
regarded as classic. His statement of canons of taxation has hardly been
surpassed in clarity and simplicity. Four canons of taxation are as
under:

A: ETHICAL ASPECTS

The
Canon of Equality

This is based on the following concept:

"The subjects of every state ought to contribute
towards the support of the Government as nearly as possible in
proportion to their respective abilities that is in proportion to the
revenue which they respectively enjoy under the protection of the
state".

This canon embodies the principle of equity or
justice. It lays moral foundation of the tax system. Adam Smith, writing
in his renowned book namely, Wealth of Nations, stated: "It is not
unreasonable that the rich should contribute to the public expense not
only in proportion to their revenue but something more than that
proportion".

Accordingly the tax will be in proportion to the
ability to pay.

B: ADMINISTRATIVE ASPECTS

1. THE CANON OF CERTAINTY

The Principle of Certainty is very important and can
get reflected in reality by implementing the guidance provided in the
following statement of Adam Smith: "The tax which each individual
is bound to pay ought to be certain, and not arbitrary. The time of
payment, the manner of payment, the quantity to be paid ought all to be
clear and plain to the contributor and to every other person. Where it
is otherwise, every person subject to tax is put, more or less, in the
power of tax-gatherer, who can either aggravate the tax upon any
obnoxious contributor, or extort, by the terror of each aggravation,
some present or perquisite to himself".

Certainty is needed not only from the point of view
of the tax-payer but also from that of state.

2. THE CANON OF CONVENIENCE

Every tax ought to be levied at the time or in the
manner in which it is most likely to be convenient for the contributor
to pay it.

3. THE CANON OF ECONOMY

Every tax ought to be so contrived as both to take
out and to keep out of the pocket of the people as little as possible,
over and above what it brings into the public treasury of the State.

Some later writers added a few more canons to Adam
Smith's four described above. Among these are: Elasticity, Flexibility,
Simplicity and Diversity.

A good tax system should comprise taxes which conform
to the above canons of taxation.

BUDGETARY POLICIES

Several cornerstones of budgetary policies were
announced in the past. Table 3 sums up pertinent aspects:

TABLE: 3

CORNERSTONES
OF BUDGETARY POLICY

Focus

Operational
Details

Productivity Capacity

Optimal utilization of productive capacity and maximization
of agricultural and industrial production to boost exports.

Revenue Base

Ability to meet all the expenditure and a substantial part of
the development cost of both Federal and Provincial Governments
from revenue resources.

A review highlighting strategic directions to reduce
tax evasion is now presented below:

A: INDIRECT TAXES

1. SALES TAX:

This is expected to be the future tax of Pakistan.
Over the years upward growth has been registered in collection. However
vast scope exists in mobilizing more amount. The sales tax rate is high
and encourages tax evasion and demotivation to pay due sales tax. An
effective dialogue between enlightened CBR officials and the potential
sales tax payers through institutionalized approach appears to represent
a strategic direction to pave the way to tackle sales tax evasion.

2. CUSTOM DUTIES:

Amount to be collected from custom duties (import and
export) will water down with effective implementation of WTO regime
w.e.f. January 01, 2005. Tariff rationalization and strengthening moral
values in custom officials are two directions requiring careful
attention. This can have healthy impact of reduction in tax evasion.

3. FEDERAL EXCISE:

The Federal Government has announced that federal
excise will be merged into sale tax over time. Process has been
initiated and steadily the amount under this head is watering down.

B: DIRECT TAXES:

Substantial amount of direct taxes include income
tax. To handle tax evasion, comments have been offered separately in
this piece.

TAX PAYEES - NUMBER

Fifty Two (52%) population in Singapore pay income
tax. Their total population is around four (4) million and their
Universities have ranked very high in Asia and Pacific region. In fact
for the last several years, National University of Singapore (NUS) has
ranked as number one in Asia and the Pacific (including Australia and
New Zealand). Their exports have exceeded US $ 130 billion against
Pakistan's exports of US $ 11 billion during 2002-2003 with a target of
US $ of 12.10 billion. Hong Kong, with a population of 6.2 million
people have twenty five (25%) as tax payers.

Our position in Pakistan appears to be highly dismal.
In a total population of 145 million, only 1.5 million are income tax
payers representing only 1%. Perception of this figure appears to be
high in terms of potential tax payers.

A strategy with firm determination to achieve
substantially higher percentage is the crying need of today. CBR is
fully aware of this challenge but needs full and willing support from
all stakeholders. If this is done, encouraging results will follow and
the hitherto tax evasion regime will start shrinking.

CBR RESTRUCTURING

With support from multilateral financial assisting
institutions, CBR has been undergoing major restructuring. Members have
been inducted from the private sector. Efforts are being made to boost
efforts for an accelerated approach to ensure domestic resource
mobilization. However there is a crying need to substantially increase
the number of tax payers which is said to be around 15 million and this
number is expected to increase to 1.8 million and later 2.0 million.
This augers well for the economic sovereignty of Pakistan.

In fact there is a need to tackle tax evasion on war
footing basis. In our opinion, synergy needs to be created through
harmonious relationship between the government and tax payers (present
and potential). Periodical dissemination of uses of revenue may inspire
confidence. The general perception is poor relating to Government's
approach of spending the state revenues. Austerity needs to be practiced
in expenditure. Demonstrated results of accomplishments need to be
publicized to inspire confidence in the public. Accordingly the people
are likely to be motivated to pay taxes. The role of institutions like
CBR, Federation Chamber of Commerce and Industry, various chambers of
Commerce and Industry in all provinces of Pakistan, various stock
exchanges, All Pakistan Textile Mills Association (APTMA) and various
trade bodies need to be solicited on institutionalized basis. The
earlier this is done the better.

TAX EVASION SECTORS

It is generally believed that there are three sectors
which are not appropriately paying taxes and not contributing to income
tax in Pakistan. These are: transporters, traders, and agriculturists.
Transporters earn considerable money but evade payment of taxes. Traders
enjoy the luxury of no documentation or poor documentation. Consequently
there is a calculated move on their part not to pay income tax.
Agriculturists enjoy income tax holiday for ever under the Income Tax
Ordinance, 2001. Since the Assemblies have been beefed up with landed
aristocracy, no effort has been made by them to bring the income earned
from agricultural directly into Income Tax net.

For any Government, the above three sectors pose a
challenge. Who will tax them?

General Musharaf's Government made a good start to
include agriculture income for income tax to be administered by
Provincial Governments as authorized in the 1973 Constitution of
Pakistan. We wish to see its true implementation.

TACKLING TAX EVASION

Comprehensive and concerted efforts are needed to
tackle tax evasion. Tax Laws should be simplified. Public needs to be
properly educated. Tax machinery is required to be re-oriented for
developing capability, capacity and credibility. Government ought to be
firmly determined for tackling tax evasion. A momentum needs to be built
whereby tax rates are reduced and tax base is broadly widened.
Collection drive should be improved. Domestic resource mobilization
through revenue collection needs to be accelerated. A target-oriented
program for tackling tax evasion is the crying need of today.

RECOMMENDED STRATEGY

1) Tax Evasion
should be given as priority number one monster and a strategy be worked
out to effectively tackle it.2)
There is a need to educate people in Pakistan for developing tax
culture.3)
Income Tax rates should be substantially reduced with quantum jump in
the number of income tax assesses. Lafer's Curve should be translated in
reality with solid work by the Central Board of Revenue. Marketing
efforts need to be institutionalized.4)
All exemptions available under the Second Scheduled annexed in the
Income Tax Ordinance, 2001 should be withdrawn and subjected to income
tax at declining rates, except for pensioners.5)
Tax structure be simplified to encourage potential assessees to deposit
the income tax into the coffers of the state.6)
A national movement must be launched with the slogan: "Let us all
pay income tax".

CONCLUDING COMMENTS

It is high time that all stakeholders must comprehend
the gravity of the situation and extend their full support to uproot the
tax evasion in Pakistan and enable Pakistan to wear a new outlook —
Sovereign Pakistan. The financial stability will enable Pakistan to
stand on her own footing and the incidence of debt service on budget
will substantially reduce and will facilitate fiscal space to allocate
funds for allocation to social sectors. A motivational approach should
be followed to ensure that tax evasion is tackled with sense of concern
and as high priority agenda.

* Principal, Hailey College of Banking and Finance,
Constituent College of the University of the Punjab, Lahore.